Truist: Valuation Remains Compelling, But A Bearish Technical Move Warrants Caution

Sep. 30, 2022 11:45 AM ETTruist Financial Corporation (TFC)KRE, SPY, XLF

Summary

  • Regional banks have outperformed the S&P 500 over the last six months despite a highly-inverted yield curve.
  • Higher interest rates through lending should more than offset slightly higher deposit rates.
  • Truist's strong long-term fundamental position is offset with near-term bearish technical risks.

Truist Financial bank exterior in Houston, TX.

Brett_Hondow

Regional banks have outperformed the broader market for the better part of six months now. The SPDR S&P Regional Banking ETF (KRE) is up by more than 10% (total returns=) compared to the S&P 500 dating back to early April. Higher interest rates should help some well-positioned banks earn better net interest income despite the notorious and heavily discussed inverted yield curve. So long as lending activity can hold up, those higher rates coupled with still-low deposit account payouts might help regionals weather possible economic turmoil.

Regional Banks Continue To Provide Alpha Amid Volatility In The S&P 500

Regional Banks Continue To Provide Alpha Amid Volatility in the S&P 500

Stockcharts.com

According to Bank of America Global Research, Truist Financial Corp (NYSE:TFC) is a Charlotte, North Carolina-based financial services company with more than $500 billion in assets. With a history dating back to the Civil War, and now one of the largest banks in the U.S. by deposits, TFC offers a wide variety of different financial products ranging from consumer and commercial banking to securities brokerage and asset management.

Now the 6th largest U.S. bank following its 2019 merger between BB&T and SunTrust, TFC has a massive presence in the growing regions of the Mid-Atlantic and Southeast. These non-macro catalysts for growth give particular upside to the bank. There's also upside risk with more cost-cutting measures and balance sheet optimization. Downside risks include a more severe recession, issues with merger integration, and perhaps some unfavorable regulatory changes on capital requirements.

The $58.7 billion market cap Banks industry company within the Financials sector trades at a low 10.0 trailing 12-month GAAP price-to-earnings ratio and pays a high 4.7% dividend yield, according to The Wall Street Journal.

On valuation, BofA has a $51 price objective incorporating recession risks that are present. Truist's historically well-performing credit book and flexibility in optimizing its assets and liabilities should promote above-market valuation multiples. The Bloomberg consensus EPS forecast shows per-share profits rising at a solid rate next year and in 2024. Moreover, good free cash flow should warrant dividend increases over that period. Meanwhile, its P/E should remain attractive in the single digits.

Truist: Earnings, Valuation, Dividend Forecasts

Truist: Earnings, Valuation, Dividend Forecasts

BofA Global Research

Wall Street Horizon's corporate event data show a Confirmed earnings date of Tuesday, Oct. 18 BMO with a conference call to immediately follow. You can listen live here. Around that time, too, shares could be on the move when Truist's management team speaks at the Mizuho ABS East Conference 2022 on the 17th through the 19th.

Corporate Event Calendar

Corporate Event Calendar

Wall Street Horizon

The Technical Take

Unfortunately, my bullish outlook back in June did not play out and the chart now flashes bearish warning signs. While the stock indeed rallied a solid 10% from late June to its August high above $52, the harsh late summer and September pullback in stocks brought down many regional banks, too.

Now I see important resistance near $45 with further supply, which I noticed back in June, in the mid-$50s.

There's hope though - if TFC can rally back above $45 to $46, that would promote upside risks via a bullish false breakdown pattern. Keep your eye on that possibility as we enter the historically bullish period of October through December of a midterm election year.

TFC: Shares Dip Under Resistance, Watch For A Bullish False Breakdown

TFC: Shares Dip Under Resistance, Watch For A Bullish False Breakdown

Stockcharts.com

The Bottom Line

I now have a hold recommendation on TFC given downside technical risks, but the company's valuation remains strong. We need to see shares rise above the mid-$40s otherwise downside price action is likely.

This article was written by

CFA & CMT Charterholder | Freelance Financial Writer at SoFi & Ally | Investments | Markets | Personal Finance | RetirementI create written content used in various formats including blogs, emails, white papers, and social media for financial advisors and investment firms in a cost-efficient way. My passion is putting a narrative to financial data. Working with teams that include senior editors, investment strategists, marketing managers, data analysts, and executives, I contribute ideas to help make content relevant, accessible, and measurable. Having expertise in thematic investing, market events, client education, and compelling investment outlooks, I relate to everyday investors in a pithy way. I enjoy analyzing stock market sectors, ETFs, economic data, and broad market conditions, then producing snackable content for various audiences. Macro drivers of asset classes such as stocks, bonds, commodities, currencies, and crypto excite me. I truly enjoy communicating finance with an educational and creative style. I also believe in producing evidence-based narratives using empirical data to drive home points. Charts are one of the many tools I leverage to tell a story in a simple but engaging way. I focus on SEO and specific style guides when appropriate. My CFA and CMT backgrounds demonstrate prowess in investment management and my professional experience includes extensive public speaking and communication. Moreover, my extensive university teaching and professional trading experience provide useful skills. Past roles also include heavy use of Excel modeling and chart creation as well as PowerPoint.I am a contributor to The Dividend Freedom Tribe. I am a contributor to Topdown Charts.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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